Record Labels

Why UMG's Public Debut Boosted Warner & Other Music Stocks Too

Universal Music Group, UMG
Lester Cohen*

(L-R) Philippe Flageul, EVP, Controller, Michael Nash, EVP Digital Strategy, Jeff Harleston, General Counsel and EVP of Business and Legal Affairs , Boyd Muir, EVP, CFO and President of Operations , Sir Lucian Grainge, Chairman & CEO , Jody Gerson, Chairman & CEO of UMPG , Eric Hutcherson, EVP, Chief People and Inclusion Officer , Will Tanous, EVP, Chief Administrative Officer

Universal Music Group shares soared 35.7% on Tuesday, rippling some of that investor excitement through the industry.

Investors’ enthusiasm for newly minted Universal Music Group shares spilled over to Warner Music Group on Tuesday (Sept. 21), helping WMG shares climb as much as 13.2% to $45.57 before ending the day at $45 -- an 11.8% gain.

Earlier in the day, during trading on the Euronext Amsterdam exchange, UMG shares climbed 35.7% -- from a conservative 18.50 euros reference price -- to 25.10 euros, valuing the world’s largest record label at 45.5 billion euros ($53.4 billion). UMG’s first day as a standalone entity followed a spin-off from Vivendi SA, UMG’s full owner since 2006, as a means to capture the value that was hidden inside the French conglomerate. Upon UMG’s departure, Vivendi’s share price fell 66.7% on Tuesday.

Demand for UMG shares may have helped two more music companies: the share prices of French music distributor Believe SA and U.S. music rights company Reservoir Media increased 3.1% and 11.6%, respectively, on Tuesday.

Investors also appeared hungry enough for UMG to purchase shares of Pershing Square Holdings, which has a 10% stake in UMG, and drive its share price up 5%.

Sensing an opportunity, WMG’s owner, Access Industries, sold 2.34 million shares to Morgan Stanley & Co. on Tuesday for an unspecified amount. WMG could benefit from the added liquidity to the market. Although the shares represent less than 0.5% of WMG’s outstanding shares, WMG’s float – shares available for trading – represent about 19% of its shares, according to multiple financial sources. (UMG says its float is 42% of outstanding shares.)

For its part, WMG, which went public in 2020, has proven to be a reliable investment: before Tuesday’s surge, WMG shares were already 61% above the $25 IPO price. Going into UMG’s listing, four securities analysts gave UMG a 10% to 40% premium over WMG — meaning they believe $1 in WMG’s hands would be worth from $1.10 to $1.40 to UMG.

After WMG’s valuation rose to about $26.4 billion on Tuesday, UMG has a 14% premium over WMG. Using each company’s earnings before interest, taxes, depreciation and amortization in 2020, UMG and WMG have multiples of 35.9 and 31.5 of value to EBITDA, respectively. Had WMG shares not grown on Tuesday, UMG would be worth a 28% premium over WMG.

The two companies’ values should be correlated to some extent: They are similarly structured – mainly record labels and music publishers – and affected by the same market forces. Both music companies benefit when Spotify and Apple Music spread the subscription model throughout the world. They will each earn royalties from emerging sources such as Peloton and TikTok, worth $235 million annually for WMG’s record labels, CEO Stephen Cooper said in the company’s Aug. 3 earnings call. Likewise, labels and publishers are almost equally exposed to global pandemics, piracy and competition from movies and other entertainment. If labels are at “the threshold of a new golden age of music,” as Cooper stated in WMG’s Nov. 3, 2020 earnings call, WMG and UMG will share the bounty.

There’s a chance the market misinterpreted UMG shares’ incredible run as a true measure of investors’ interest. First-day trading volume was only 6.8% of available shares, possibly because not enough Vivendi shareholders, who receive 60% of UMG shares through a one-off distribution, could satisfy investors’ demand. Once the market has more liquidity, supply will converge with demand, and the share price could better reflect UMG’s true market value.

UMG’s first-day market value was, however, well within analysts’ estimations. A dozen securities analysts estimated UMG’s value to be from $35.5 billion to $62 billion, with an average of $47.5 billion.